Budget deficit is inevitable, says Swan

The federal government has for the first time conceded a budget deficit is
inevitable as it continues to add the finishing touches to an imminent fiscal
stimulus package.
Prime Minister Kevin Rudd met with Treasurer Wayne Swan and Finance Minister Lindsay
Tanner over the weekend to work a second stimulus package aimed at giving the
economy a much-needed jolt.
The latest instalment of stimulus measures, which will add to last year's $10.4
billion economic security package, is expected to include a mix of infrastructure
spending, as well as various cash injections aimed at boosting consumer activity.
The Reserve Bank of Australia (RBA) is expected to cut official interest rates by as
much as 100 basis points when it meets on Tuesday, a move which will also have a
stimulating effect on the economy.
But with the global economy continuing to slow, the impact on Australia is expected
to be much worse than previous forecasts have suggested.
The International Monetary Fund last week predicted the Australian economy would
contract by 0.2 per cent in 2009, and at the very best stall to a position of zero
growth.
Mr Swan on Sunday again refused to "rule anything in or out" as part of any
government response to the rapidly deteriorating conditions but voiced a reluctance
to include broad-based tax cuts in the package.
The treasurer, however, for the first time conceded a budget deficit is unavoidable.
"Company taxation could be down as much as $50 billion over four years as a
consequence of the global recession," he said.
"Of course what that means is, because of the unwinding of China, the global
recession, it will be inevitable that Australia has a temporary budget deficit."
He refused to comment on the IMF forecast, except to say that it was clear the
global recession would "be deeper and it's going to be longer ... than many people
envisaged only a few short months ago".
Senior government sources have reportedly confirmed that tax cuts for low-income
earners are still on the table as part of the latest stimulus package, expected to
be announced as early as this week.
It is believed the government is considering raising the low-income tax offset to
$1,500 and lifting the threshold for the 30 per cent tax bracket to $37,000 from the
current $34,000, at a cost of $2.75 billion, News Limited reported.
Mr Swan favours targeted tax relief over more generalised tax cuts as has been
suggested by Opposition Leader Malcolm Turnbull.
"I don't rule anything in or out. What I certainly ruled out last Friday was
bringing forward generalised tax cuts, the type of which Mr Turnbull had suggested."
Mr Turnbull on Sunday said Mr Swan's comments amounted to a policy backflip and
maintained more broad-based tax relief should be a part of the next stimulus
package.
"Tax cuts that affect lower and middle-income earners are particularly effective,"
Mr Turnbull told reporters in Sydney.
Opposition treasury spokeswoman Julie Bishop said tax cuts should be at the centre
of the next stimulus package.
"Tax cuts drive productivity growth and they act as an incentive for people to work,
for people to invest, to take risks, to increase entrepreneurial activity and that's
what we need in our economy right now," she said.
"There is plenty of evidence across the world that permanent tax cuts do stimulate
the economy but temporary one-off injections do not."
The opposition says the government should also detail how it plans to pull the
economy back into surplus.
"If the government is going into deficit, it must have a plan to put the budget back
into balance," she said.
"If the government chooses to go into deficit, it is a discretionary spend. Then
there must be a strategy to exit it."